Southern California-based El Pollo Loco, which went public just three weeks ago, has already seen its shares climb as much as 71%. Before Tuesday, the stock was trading around $US33.

Today shares were down 10%.

In a new note, Morgan Stanley’s John Glass and Jake Bartlett say they are initiating coverage on the stock with an under-weight rating and a $US22 price target, saying it’s gotten far out ahead of a host of metrics.

“The market appears to be paying a premium … far above what we consider to be fair value — and well above any reasonable peer comparable,” they write. “We note that several other recent IPOs have followed a similar course, with initial valuations based more on scarcity value than fundamentals. Many of these have underperformed post the initial IPO upside.”

The pair then present three cases for how shares could trade from here, which they call “Pollo en Fuego,” “Pollo Bueno,” and “Pollo Muertos.”

The main risk, they say, is that the chain fails to meet its ambitious growth plans: The company plans to go from opening six new stores a year for the past three years to 45 new ones in the next three. This could produce margin pressures, site selection missteps and delays, they write.

They also note that Pollo Loco was recently trading at 56x earnings, compared with the 32x rate of closest peer Fiesta (which owns Pollo Tropical and Taco Cabana) and 39x for current burrito king Chipotle.

And as articulated in the Pollo Muertos case above, they seem to be betting heavily on success in large markets like Houston. If those fail to take off they are likely to struggle elsewhere.

But the rest of the note is pretty upbeat. They cite a host of items the firm has going for it, including strong leadership from CEO Steve Sather, who’s put together a team of deputies from leading fast-food chains; an increasingly diverse clientele that now has Hispanics accounting for just of 29% of diners compared with 45% for Caucasians; and 12 consecutive quarters of positive same-store sales growth.

Even in the “Muertos” case, a 24x multiple still bests those of regional fast-food chains.

And of course there’s the pollo itself:

LOCO’s menu pricing is attractive, with its traditional family meal business comparable to offers at chicken based QSRs like KFC (with what we consider to be better quality and certainly healthier fare), while its newer entrée business (burritos, etc.) are priced 10-15% lower than comparable items at Mexican fast casuals (e.g. CMG). We think this positioning in unique in the market and sets LOCO up well. ELP’s price point is similar to traditional QSR competitors but 10-15$ below fast casual.